Technology's impact: Robert Reich

FRAMINGHAM (10/06/2003) - I.T. employment is down 20 percent since early 2001. Salaries are down too. In 2000, senior software engineers earned up to US$130,000. The same job now pays no more than $100,000. In 2000, entry-level computer help desk staffers earned about $55,000; now, $35,000.

The main reason is the lousy economy. First came the loud pop of the high-tech bubble, then 9/11, then corporate fraud. Since the start of 2001, 2.6 million private-sector jobs have disappeared in America. It's been the longest job-market downturn since the Great Depression.

Add in productivity gains that have been growing much faster than the economy, especially in technology sectors, and you've got even less need for labor. Machines can do more. The enormous productivity gains brought on by IT itself has, ironically, reduced the need for many midlevel project managers. Economic output has expanded at an annual rate of 2.7 percent since the fourth quarter of 2001. During the same period, worker productivity (output per hour of work) has expanded at a rate of 4.2 percent. That gap between economic output and productivity is the widest yet. Until growth catches up with productivity gains, don't expect a lot of jobs to return.

But there's a third reason: the trend toward the global outsourcing of IT. This year, more than half of all Fortune 500 companies are outsourcing some software development. It's estimated that by 2005, more than 80 percent of such companies will join the trend. American financial services companies expect to transfer half a million jobs--9 percent of financial services employment--to foreign nations during the next five years. U.S. technology companies now pay foreign organizations $10 billion a year to handle data entry, analysis, customer service and computer programming.

Don't get me wrong. Global outsourcing is a small factor relative to the bad economy and the productivity gains wrought by automation. The number of IT jobs sent abroad still accounts for a tiny proportion of America's 10-million-strong IT workforce. But there's no doubt that the trend is gathering steam.

The reason is that foreigners can do a lot of IT jobs just as well and much more cheaply than they can be done in the United States. The starting salary of a software engineer in India is around $5,000. Experienced engineers get between $10,000 to $15,000. Top IT professionals might earn up to $20,000.

Their numbers are growing. India, where the bulk of foreign IT jobs are, already has 520,000 IT professionals. It's adding 2 million college graduates a year, many of whom are attracted to the burgeoning IT sector.

Meanwhile, it's become far easier to coordinate such work from headquarters in America. Overseas cable costs have fallen 80 percent since 1999. With digitization and high-speed data networks, an Indian office park can seem right next door.

A study by Forrester Research estimates that by 2015, some 3.3 million more American white-collar jobs will shift from the United States to low-cost countries, mostly to India.

Underlying the trend toward foreign outsourcing of IT is the reality of tough global competition and a sagging domestic economy. Both are putting immense pressure on American companies to reduce costs. That's why more and more organizations are buying rather than making, and outsourcing has become the name of the game. And as salaries account for about

70 percent of most companies' expenses, the cost-cutting has been concentrated on payrolls.

In the old way of thinking, employees were an investment just like factories or equipment. Adding workers was a major expense, and cutting them was a decision not taken lightly. Today, most employees are seen as units to be stockpiled or shed as business warrants. Technology not only allows fewer people to do the jobs of many; it also allows their skills to be taught to anyone, quickly, anywhere around the world. Hence, most companies have started to think of wages as variable rather than fixed costs.

This is good news for consumers. Prices are low. Inflation has become a nonissue. The cost of many technology goods continues to drop.

But it's not necessarily good news for American workers, especially high-tech employees who used to be shielded from the direct effects of global competition. Manufacturing workers have been losing jobs to low-cost foreign workers for years. Low-skilled service workers, like call-center operators, were the next to lose jobs to low-cost foreigners. Now, it's professional and technical workers' turn.

In the short term, when the U.S. economy bounces back from recession--as it surely will within the next 18 months--we can expect many IT jobs to return. But given the long-term trend in foreign outsourcing, what's to stop all IT work from moving abroad, eventually?

Three things.

First the risk. Outsourcing--especially to a country 10,000 miles away--increases the possibilities of loss or theft of intellectual property, sabotage, cyberterrorism, abuse by hackers and organized crime. Not much of this has happened yet. But as more IT is shipped abroad, the risks escalate. Smart companies will keep their most important functions in-house, at home.

Second is quality control. The more complex the job order and specs, the more difficult it is to get it exactly right over large distances with subcontractors from a different culture. In a recent Gartner survey of 900 big U.S. companies that outsource IT work offshore, a majority complained of difficulty in communicating and meeting deadlines. So it's unlikely that the most complex engineering and design can be more efficiently done abroad.

Third is the competitive pressure for continuous innovation. Even as they ship out "commodity" IT work overseas--including software maintenance and support, and even infrastructure support--the best companies are simultaneously shifting their in-house IT employees to more innovative, higher value-added functions, such as invention, integration, key R&D and basic architecture. Companies need to continuously nurture these core creative activities, which are at the heart of their competitive futures.

All this means that, despite the long-term trend toward outsourcing IT jobs, there will continue to be plenty of IT work in the United States in years to come.

The U.S. government should not try to protect or preserve IT jobs in America, or block efforts by American companies to outsource. That would only put American companies at a competitive disadvantage. Their rivals in other advanced economies would continue to have access to low-cost IT services from developing nations.

The best approach is to ensure that American schools and universities continue to provide the best problem-solving education anywhere in the world, so that we continue to generate IT managers and programmers who are creative and adaptive. American companies will also need to invest more in developing the skills of their IT workers, which requires more than just training in the latest computer language. Millions of people around the world can and will learn the necessary computer language.

In order to justify their high salaries, America's future IT workers will need to be more like management consultants, strategists and troubleshooters. They'll need an intimate understanding of the business so that they can devise new IT solutions. They'll help decide which IT work can most efficiently be outsourced; and they'll be liaisons between the work that goes offshore, the work that's subcontracted to other companies in the United States and the IT work done in-house.

The transition will not be entirely smooth. But if we handle it right, American organizations will be stronger and more competitive, and American IT professionals will have rewarding opportunities for years to come.

SIDEBAR

Robert B. Reich

What He Thinks About: The international economy and American progressivism.

Where He Thinks: At The American Prospect, where he is founder and national editor. He is also the Maurice B. Hexter Professor of Social and Economic Policy at Brandeis University and its Heller Graduate School.

What He's Written: The Future of Success (2002), among other books.

Where He Is On The Web: His website.

Bio Bit: The U.S. Secretary of Labor during the Clinton administration, Reich resigned that position to spend more time with his wife and teenage sons. He posed nude in a grocery store holding a strategically placed shopping basket for a 2004 calendar to raise funds for a Cambridge community television group.

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